Investors have been warned about the risks of using crypto currency – a virtual currency such as Bitcoin or Ether – to fund start-ups.
Regulator the Financial Conduct Authority (FCA) has issued a warning about so-called ‘ICOs’, which refers to a digital way of raising funds from the public where crypto currency is exchanged for a ‘coin’ or ‘token’ related to a specific firm or project.
ICOs vary widely but often these digital coins or tokens may represent a share in a firm or a prepayment voucher.
However, according to the regulator, the value of these ‘tokens’, like crypto currencies in general, can be “extremely volatile and vulnerable to dramatic changes” and in some cases, have no discernible value at all.
As such, the FCA warns that these are “very high-risk, speculative investments” and as most ICO’s aren’t regulated, there’s no protection from the Financial Services Compensation Scheme or the Financial Ombudsman Service if something goes wrong.
Because these are early stage projects there is also a good chance you’ll lose your entire crypto currency stake, says the FCA.
Fraudsters may also be taking advantage of the situation to gain money from unsuspecting victims.
Protect yourself from ICOs
The FCA says you should fully research the specific project if you are thinking about buying digital tokens.
It adds that you should only invest in an ICO if you are an experienced investor, confident in the quality of the ICO project itself such as the business plan, technology, and people involved, and you’re prepared to lose your entire stake.
If you suspect that an ICO is a scam, report it to the FCA using its online form.